FBA Issue 34: September / October 2010

 

 

 

 

After spending much of the second quarter swooning, the past month has seen both coarse grains and oil seeds make impressive comebacks. The last week has seen a pause in their rally but their underlying strength should not be underestimated. Most impressively, their overall rise has been broadly based across multiple crops. Essentially, each feed material is providing its substitutes consistent, mutual price support across both the grain and oil seed complexes.

 

 

Of the two, grains have put in the more impressive performance, with CBOT corn and wheat rising approximately 20% to soy's 11%. The first rally leg commenced in late June, after China's corn imports built a price floor below coarse grains. At that time, USDA corn inventory revisions resulted in global corn inventories to be as tight as they were believed to be last January, when a bull market was underway.

 

Initially, this dragged up the price of corn but recently, wheat has been more bullish and started providing corn price support. Indeed, while corn was restored to its price level of late 2009, wheat prices are at their highest in two years, briefly touching US$6/bushel.

 

At first, while USDA corn supply estimates were cut, it assumed that a larger American wheat crop would offset drought induced losses in Europe. However, this week saw European wheat supplies a series of major blows amid worsening drought conditions.

 

German analyst firm DBV confirmed the fears of that country's farmers. According to DBV, Germany, the EU's second largest grain producer, will have a 20% smaller wheat crop this year.

 

 

However, the most inflationary news came from Russia's wheat supply predicament. Prime Minister Vladimir Putin personally announced that after growing 97 million tonnes of wheat last year and exporting 22 million, all exports would be banned through the end of 2010. Over the last fifteen years, the country went from being a major wheat importer to an exporting powerhouse. Exporting approximately 20 million tonnes annually, recent years have seen Russia's bounty repeatedly crowd out higher priced US wheat. This year, as it faces the worst drought in 130 years, that will not be the case.

 

Analyst firm SovEcon now expects Russia's wheat harvest to fall to below 60 million tonnes, far less than the 77 million tonnes required by domestic consumption. With only 9 million tonnes in state reserves, Russia looks ready to remove 20 million tonnes of exports and require up to 10 million tonnes of imports. This removes approximately 30 million tonnes of wheat from the world export market.